The Only Information Needed to Make Multifamily Investment Decisions

The real estate community has become obsessed with data. In
the multifamily space alone, there are countless sources for all sorts of
‘relevant’ data; Costar, Axiometrics, REIS, Reonomy, RCA, MPF Research, Yardi
Matrix, etc.

The access to data has brought transparency to the space,
but has led to better decision-making or just more noise?

There’s been several studies which have concluded that more information doesn’t necessarily lead to better investment decisions and oftentimes, having more information can be harmful because it leads to over-confidence and fuels confirmation bias.

When evaluating multifamily investments, investors tend to
get caught up in the amount of information and data they have, rather than its
validity. However, when making multifamily investment decisions, there is only
a handful of data points that are relevant and materially impact investment
success.

There are several reasons we seek out more information:

Most investment professionals don’t know which data is relevant, so they include all information they can find.

If investment decisions go wrong, investors want to cover their ass by showing they did a lot of research.

It’s difficult to raise capital if it appears that you over-simplified your decision-making.

If you make decisions based on a few pieces of information, you look lazy and unsophisticated.

I find myself falling into this trap all the time. I’ll
include all the data that supports my investment thesis because it makes me
feel more confident in the decision.

Real estate, and multifamily, is a relatively simple asset
class to underwrite and there are only a handful of data points which influence
the investment decision.

In the value-add multifamily deal-screening checklist, I went through the key questions to ask and the information needed to make informed decisions. In this post, I want to dig deeper into the key pieces of information needed to make quality investment decisions.

Here are the top 5 pieces of information that matter
when assessing multifamily investments.

Rent/Sales Comps

Above all else, I’m a value investor. I seek properties that
can be acquired at an attractive basis, below replacement cost and comparable
sales, where value can be added at the property-level. I don’t want to rely on
market rent growth for the investment to succeed. It’s too unpredictable.

To better understand the attractiveness of the basis and
upside in rents, you need to evaluate the current rent and sales comps. With
the sales comps, I typically look at the price-per-unit and going-in cap rate. Going a bit deeper, I try to estimate the
all-in basis of the comp set using the sale price and my knowledge of their
renovation.

Rent comps are used to set the pro forma rents and confirm
the submarket occupancy. Typically, I’ll use 2-3 comps to set the pro forma
rents, then assess higher-quality and lower-quality properties to ensure
there’s a wide enough spread in rents. For example, if luxury properties with
resort-style amenities are renting for ~$2.00/SF, I’d want to ensure our pro
forma rents are ~$1.50/SF or less. If the low-priced competitor has rents
of $1.00/SF, I’d want to make sure we’re not priced at more than $1.50/SF.

T12 Income Statement
and Current Rent Roll

Once I determine an opportunity isn’t overpriced, the first thing I do is review the current rent roll and T12 monthly income statement. I use redIQ to analyze the rent roll looking at the in-place rents broken down by unit type, rents of leases completed over the last 30/60/90 days (or recent 5-10 leases), and the lease expiration schedule. This helps me analyze the in-place income, where things are trending, and any sort of seasonality in the market.

Looking at the T12, I’m focused on bad debt/concessions to
assess the quality of the current tenancy. I look at the expenses on a
high-level $/unit/year basis to confirm expenses are in-line with our other
properties. I’ll also look at the expense ratio to confirm it’s in line with
the market. Expenses that tend to be out of whack are taxes and insurance,
R&M, and Utilities.

Once under contract on a deal, we’ll dig into the bank
statements to confirm collections, delinquency reports to see if there’s any
bad debt sitting on the books, and maintenance logs to better understand
recurring maintenance issues.

Population and Employment
Growth

Although the investment isn’t reliant on market growth, it’s
still important that the submarket be in the path of growth (and more
importantly not shrinking). There need to be good reasons why people want to
live there; we look for a mix of quality of life and cost of living, access to
employment centers, quality school districts or some combination thereof.

Area Median Income
(1/3/5-mile radius)

The rent comps, and typically 1-2 specific properties, are
used to set the pro forma rents. We aim to set rents just below the competitive
set, while also delivering a higher quality product at a lower all-in basis. We
also need to assess the median income of the area to confirm there is a deep
enough pool of renters to afford our post-renovation rents. If we’re targeting
$1,500 monthly rents and the median income is $30,000, we may need to reassess
our business plan (we require 3x the monthly rent to qualify). It doesn’t
matter how great your property is if it doesn’t match the needs of the
submarket.

So there you have it. If I have these 5 pieces of
information, I can make an informed investment decision. Rather than seeking
out additional information, I’d be better off digging deeper into the most
relevant information, then monitoring the outcomes of decisions using only this
data.

Which pieces of
information do you find most useful when underwriting multifamily investments?

About Me

This is my personal blog where I share tips on starting your real estate career, challenges of doing your first deal, and advice on passive real estate investing. For work, I run acquisitions for Atlas Real Estate Partners, a private investment firm based in NYC where I was the first hire.

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